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SEC Targets Auditor Conflicts of Interest

On Behalf of | Mar 25, 2022 | Regulatory Issues (SEC, FINRA)

An independent auditor must remain free from conflicts of interest that could give the auditor a personal stake in the company they are auditing. This concept is at the heart of a probe being conducted by investigators from the Securities and Exchange Commission (SEC). The results of the investigation will affect accounting firms and the businesses that rely on auditing services provided by accountants.

The risk for large accounting firms

For most large accounting firms, auditing is one of many services provided. Other services include consulting, tax advice, lobbying and a variety of services to help a business make forward-thinking decisions while remaining above board. When an accounting firm provides such services and also helps the same company conduct a supposedly independent audit, the accounting firm risks being perceived as engaging in unlawful conduct.

What is not allowed?

The SEC prohibits an auditor from providing non-audit services such as:

  • Bookkeeping
  • Designing financial information systems
  • Management and human resources services
  • Investment advice
  • Legal services not related to the audit

Last year, the SEC sent letters to a number of accounting firms regarding potential conflicts of interest. Many of those firms have agreed to settlement offers. Since 2014, the four largest accounting firms in the country have paid multi-million dollar fines to the SEC, resulting from investigations into auditing conflicts of interest.

Protections for shareholders

The SEC’s stated goal in the investigation is to protect shareholders from unscrupulous dealings by public companies. Investors rely on accurate data when making decisions about investing in public companies, and conflicts of interest in the auditing process erode that trust to the detriment of the trading environment.

Steering clear of regulatory scrutiny

Whether you work for an auditing firm or rely on independent auditing services, you do not want your auditing activity to draw the attention of federal investigators. The attorneys at Ford O’Brien Landy LLP can help you implement policies designed to identify and eliminate conflicts of interest and other regulatory issues. If a problem does arise, we can provide you with accounting defense representation focused on achieving an efficient and lasting resolution. We provide strategic counsel for CEOs, CFOs and COOs, and we advise and represent clients in New York, Texas and nationwide.

Sources: Wall Street Journal, “Big Four Accounting Firms Come Under Regulator’s Scrutiny,” March 15, 2022; SEC.gov, “Audit Committees and Auditor Independence”